OIL FUTURES: Crude Turns Positive After Early Plunge Below $97

DavidWinning

SYDNEY (MarketWatch) -- Crude oil futures recovered from a sharp fall below $97 a barrel Thursday to move into positive territory, after Japan's biggest utility said it hopes to restore power to the quake-hit Fukushima Daiichi nuclear plant within hours.

Tokyo Electric Power Co.'s (9501.TO) comments that it may be close to cooling reactors at risk of meltdown helped reassure markets, which were earlier rattled by a top U.S. official in charge of nuclear power regulation signaling the atomic crisis may be worse than previously thought.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in April traded at $98.60 a barrel at 0658 GMT, up $0.62 in the Globex electronic session.

That represented a major recovery after a breach of the $97 support level within the first hour of trading prompted a major liquidation of holdings, driving the front-month contract to an intraday low of $96.60 a barrel at 2253 GMT.

May Brent crude on London's ICE Futures exchange rose $0.70 to $111.30 a barrel, after earlier hitting an intraday low of $109.45.

Oil markets are watching developments in Japan closely as the country is the world's third-largest oil user after the U.S. and China, consuming around 4.4 million barrels of crude a day.

Traders have sold off crude oil futures in recent days, given it's unclear how big an impact Friday's earthquake and tsunami will have on slowing Japan's economy and for how long.

"The oil market's reaction to the Japanese earthquake is overdone, in our view, given the potential increases in oil demand resulting from the permanent loss in nuclear capacity far outstripping the short-term negative impact on demand," said Amrita Sen, an oil analyst at Barclays Capital.

The Petroleum Association of Japan said Thursday that the country's crude processing was expected to recover to 3.4 million barrels a day by the end of the month, from 2.7 million barrels a day immediately after the quake.

That has allowed traders to quantify the lost output at 600,000 barrels per day, although Japan will likely need additional volumes of fuel oil for use in power generation to guarantee supply while quake-damaged thermal coal and nuclear power plants are offline.

The PAJ said it has canceled exports of 650,000 kiloleters of oil products following the earthquake, and that the country will also likely need to import 450,000 kiloleters by the end of the month to help cover the domestic supply gap.

Refiners in South Korea are among those hiking exports to Japan. S-Oil Corp. (010950.SE) said Thursday it plans to supply 2.4 million barrels of oil products to Japan's refining industry. Japan has also officially asked Indonesia to ship additional liquefied natural gas and crude oil.

Support for oil prices is also coming from the Middle East and North Africa. Bahraini security forces carried out a violent crackdown against protesters Wednesday to drive them from the center of the capital Manama, and imposed a curfew across much of the city, as the island kingdom attempted to end weeks of demonstrations.

Fighting is also intensifying in Libya between rebels and the ruling regime. Moammar Gadhafi's forces attacked the last rebel-held major city in western Libya and expanded territory near the eastern rebel capital of Benghazi, as the government gained momentum in its bid to reassert control.

However, it isn't a consensus view that oil's sell-off is overdone.

In a sign of how twitchy commodity markets continue to be, oil fell sharply after Gregory Jaczko, chairman of the Nuclear Regulatory Commission, said the spent fuel pool at the fourth reactor at the Fukushima Daiichi nuclear power plant in Japan has lost all or most of its water and radiation levels "are extremely high."

Given the risks, Jaczko said, the U.S. would recommend a "much larger radius" for evacuations than Japan had imposed.

Jim Ritterbusch, president of oil trading advisory firm Ritterbusch & Associates, believes the decline in oil futures still has some way to go, possibly to $95/bbl, as global equity markets fall as bad news continues to flow out of Japan.

The Dow Jones Industrial Average closed 242.12 points lower Wednesday, or 2.04%. In Asia on Thursday, Japan's Nikkei Stock Average was down 2.2%, Australia's S&P/ASX 200 was flat, and South Korea's Kospi Composite was down 0.7%.

"While conceding to the possible need to insert additional Middle East and North Africa risk premium into the market, we also feel that the ongoing plunge in the equity markets and implications for additional broad based deleveraging could win out as a price motivator," Ritterbusch said.

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